A company has 15 year bonds outstanding, with a 5% annual coupon, a face value of \$1000, and a current market value of \$1100. What is the company's pre-tax cost of debt?

I'm tempted to think it's just 5%, as when the company originally sold the bonds it received $1000 and is paying 5% coupons on that original face value, but the inclusion of the current market value is confusing me. I'd appreciate any help you can give me.

1 Answer
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It's a simple TVM problem - solve for the interest rate. The "current" cost of debt would be market determined, so that's why you use the market value. It ties into how bond accounting works - the premium of the bond is amortized until maturity. The amortization amount would be the difference between the coupon and the interest expense(market rate at issuance)